Stryker Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are principally with fiscal 2012. Unless stated otherwise, financial amounts are in millions of dollars. This filing reports full-year results, not standalone fourth-quarter results.
Business context
Stryker is a global medical technology company selling reconstructive implants, MedSurg products, and neurotechnology and spine devices. It reported $9,021 in 2013 revenue, with 66.3% generated in the United States. Revenue by segment was Reconstructive $4,004, MedSurg $3,359, and Neurotechnology and Spine $1,658.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $9,021 | $8,657 | +4.2% |
| Gross profit | $6,044 | $5,876 | +2.9% |
| Operating income | $1,256 | $1,741 | −27.9% |
| Net earnings | $1,006 | $1,298 | −22.5% |
| Diluted EPS | $2.63 | $3.39 | −22.4% |
| Operating cash flow | $1,886 | $1,657 | +13.8% |
Gross margin was approximately 67.0% versus 67.9%; operating margin was 13.9% versus 20.1%; and net margin was 11.2% versus 15.0%. Cost of sales rose to 33.0% of sales from 32.1%, including a medical-device excise tax equal to 0.9% of sales. R&D expense increased to $536 (5.9% of sales) from $471 (5.4%).
Management’s non-GAAP adjusted net earnings were $1,616, up 3.6%, and adjusted diluted EPS was $4.23, up 3.9%. These measures exclude specified recall, acquisition, restructuring, legal and regulatory, donation, and tax items; they are not substitutes for GAAP results.
Cash, cash equivalents and current marketable securities totaled $3,980, down from $4,285. Current assets exceeded current liabilities by $5,678, compared with $6,272. Total debt was $2,764, up from $1,762; cash and marketable securities exceeded debt by approximately $1,216. The company reported $1,052 of available borrowing capacity under existing credit facilities. Approximately 78% of cash, cash equivalents and marketable securities were held outside the United States.
Investing activities used $2,217, chiefly due to $2,320 of acquisition spending; capital expenditures were $195. The company paid $401 in dividends and repurchased $317 of shares. Its $1,000 revolving credit facility is due in 2017; the company reported compliance with its covenants.
Material changes versus 2012
- Sales growth was 4.2%, but adjusted for currency and acquisitions, sales increased 5.1% in constant currency. Unit volume and mix contributed 6.5%; pricing reduced growth by 1.4%, and currency by 1.6%.
- All segments grew: Reconstructive 4.8%, MedSurg 2.9%, and Neurotechnology and Spine 5.6%. U.S. sales increased 5.8%; international sales increased 6.0% in constant currency.
- Reported earnings fell substantially, driven in large part by recall-related, acquisition and integration, legal and regulatory, and other specified expenses. SG&A increased 17.3% to $4,066, including $622 related to the Rejuvenate, ABG II and Neptune recall matters.
- Acquisitions expanded the portfolio and increased debt and goodwill: Stryker acquired MAKO for approximately $1,679 in December and Trauson for $751 in March. Goodwill rose to $3,844 from $2,142.
- The effective tax rate declined to 17.0% from 23.9%, including benefits from favorable tax-audit resolutions.
Outlook, commentary and risks
The filing provides no specific numerical forward-year revenue or earnings guidance. Management cited continued investment in new technologies and strategic areas. The company expected its announced $120 Patient Safety Technologies acquisition to close in the first quarter of 2014, subject to customary conditions.
The largest disclosed contingency is the 2012 Rejuvenate and ABG II modular-neck hip-stem recall. The estimated probable loss range was $790–$1,235 before third-party insurance recoveries; Stryker had recorded the $790 minimum, including $600 of additional 2013 charges. The final cost and payment timing remain uncertain and could materially affect results and cash flows.
Other notable matters include an ongoing DOJ investigation concerning OtisKnee sales and marketing (with $80 of cumulative charges, including $47 in 2013); an ongoing DOJ investigation concerning PainPump; and Hill-Rom patent litigation. A court ordered Zimmer to pay at least $228 in a Stryker patent case, but Zimmer appealed and Stryker recorded no contingent gain. Stryker also disclosed that a March 2013 FDA warning letter concerned quality-system and product-clearance matters; in January 2014, the FDA advised that no further corrective actions related to that letter were required.
Key risks include product liability and regulatory enforcement, healthcare cost containment and pricing pressure, foreign exchange and international market exposure, competition and product innovation, acquisition integration and goodwill impairment, and uncertain tax positions. The company is self-insured for product-liability claims. Its financial statements received an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective, although the assessment excluded newly acquired MAKO and Trauson.
Important facts for investors to verify
- Track the hip-recall claims, patient treatment costs, insurance recoveries, and whether the $790–$1,235 estimated loss range changes.
- Assess whether sales growth and adjusted earnings growth translate into sustained GAAP earnings and margins after unusual charges.
- Review MAKO and Trauson integration, purchase-accounting estimates, goodwill, and subsequent acquisition performance.
- Monitor debt, cash deployment, and the accessibility of offshore cash alongside acquisition, dividend, and share-repurchase spending.
- Follow the DOJ and Hill-Rom matters, regulatory compliance developments, and the effect of pricing, currency, and medical-device taxes.